In re Kidwell
| Decision Date | 25 August 1993 |
| Docket Number | Bankruptcy No. 92-28334-C-7. |
| Citation | 158 BR 203 |
| Parties | In re Kelly G. KIDWELL, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of California |
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William L. Dunbar, Dunbar & Vodonick, Roseville, CA, for debtor.
Raymond P. Burton, Jr., Auburn, CA, for petitioning creditors.
Must the court dismiss an involuntary petition merely because the sole petitioner circumvented the three-petitioner requirement by intentionally misrepresenting the number of creditors even though three other creditors oppose dismissal and demand their statutory right to join in the petition?1 It is a clash between 11 U.S.C. § 303(b), which requires three petitioners whenever there are at least twelve creditors eligible to petition, and 11 U.S.C. § 303(c), which authorizes eligible creditors to join in the petition after filing with the same effect as if the joining creditor had been one of the initial petitioners. The answer is no, statutory joinder cannot be blocked in order to permit a dismissal that could not occur if joinder were to be permitted.2
This conclusion contradicts the bar-to-joinder doctrine (sometimes called the "good faith doctrine") under which courts sometimes block statutory joinder in single creditor petitions because the first petitioner did not file in good faith and then dismiss the case for insufficiency in number of petitioners. The doctrine was dormant until recently exhumed by the Eighth Circuit.
I am now urged to apply that doctrine, which was never universally embraced and which is not binding in the Ninth Circuit. Not only do I decline to apply the doctrine to bar joinder in this case, I suggest that the time has come definitively to scrap it as obsolete, counterproductive, and inconsistent with the 1978 Bankruptcy Code.
Under the Bankruptcy Code, joinder can cure a deficiency in number, even if the first petitioner cheated. Courts now have ample powers for dealing with bad actors without having to throw a meritorious case out of court, i.e. dismissing a case deserving of an order for relief on the merits. The question of dismissing an involuntary bankruptcy case is independent of the matter of joinder. The case may still be dismissed if appropriate, but it should be only after pending joinder requests are addressed and not solely because of the initial petitioner's putative misbehavior.
This involuntary chapter 7 case was commenced when one creditor ("Jones") filed a petition on Official Form No. 5 alleging (by checking applicable boxes) that she is eligible to file the petition pursuant to section 303(b), that the debtor is a person against whom relief may be ordered, and that the debtor is generally not paying debts as they become due. She further alleged that her claim is approximately $47,000. Jones and her counsel signed the petition.
The debtor moved to dismiss under Federal Rule of Civil Procedure 12 alleging Jones' lack of good faith in impliedly asserting that there are fewer than twelve creditors eligible to petition. This is important because three creditors are necessary to commence an involuntary case when there are at least twelve creditors eligible to petition. 11 U.S.C. § 303(b).
Six other creditors, whose claims ($62,214) are sufficient to have permitted them to file their own involuntary petition, filed motions to join in the petition as of right pursuant to the involuntary petition joinder statute. 11 U.S.C. § 303(c).
The debtor invoked the bar-to-joinder doctrine to assert that the court could not act on motions to join until after ruling on the debtor's motion to dismiss.
The bar-to-joinder doctrine functions as a tactical device to short-circuit the statutory power of creditors to cure a deficiency in number of petitioners by joining in the involuntary petition.
Although punctuated by squawks about the initial petitioner's evil motives and sometimes called the good faith doctrine, the salient point is that the debtor in a case launched by too few creditors wants to preempt statutory joinder and then have the case dismissed for having an insufficient number of petitioners. Creditors who are barred from joinder through no fault of their own are told to go file another petition if they want to press an involuntary bankruptcy. As a result, in a case that genuinely should be in bankruptcy, the debtor is permitted to manipulate the date of the filing of the petition and frustrate potential avoiding actions.
Assessing the continuing vitality of the bar-to-joinder doctrine, which is commonly said to have had its origin in Myron M. Navison Shoe Co. v. Lane Shoe Co., 36 F.2d 454 (1st Cir.1929), and which was essentially moribund until the decisions in Basin Electric Power Co-Op v. Midwest Processing Co., 769 F.2d 483 (8th Cir.1985), aff'g 47 B.R. 903 (D.N.D.1984), cert. denied, 474 U.S. 1083, 106 S.Ct. 854, 88 L.Ed.2d 894 (1986), in light of the evolution of statute and rules since 1929, begins with a review of the substantive defense to which the doctrine relates.
The bar-to-joinder doctrine arises in the context of the substantive defense that the involuntary petition was not filed by the minimum number of eligible petitioning creditors required by the statute. At least three qualifying creditors must file the petition unless there are fewer than twelve such creditors in which case a single petitioner may file.3
The defense, which often is coupled with an attack on the eligibility of particular creditors to be petitioners, has two essential elements: first, that three qualified petitioners did not sign the petition; second, that more than eleven creditors qualify.
Failure to comply with the three-petitioner requirement is a substantive, not a jurisdictional, defense. The filing of a petition sufficient on its face, containing the essential allegations, invokes the subject matter jurisdiction of the bankruptcy court. Canute Steamship Co., Ltd. v. Pittsburgh & West Virginia Coal Co., 263 U.S. 244, 248, 44 S.Ct. 67, 68, 68 L.Ed. 287 (1923);4Mason v. Integrity Ins. Co. (In re Mason), 709 F.2d 1313, 1318-19 (9th Cir. 1983); Dunlop Tire & Rubber Corp. v. Earl's Tire Serv., Inc. (In re Earl's Tire Serv., Inc.), 6 B.R. 1019, 1022-23 (D.Del. 1980); In re Alta Title Co., 55 B.R. 133, 137 (Bankr.D.Utah 1985); 2 L. King, Collier on Bankruptcy ¶ 303.156 (1992).
As a substantive defense, a defect in the three-petitioner requirement is waived if not timely raised. Mason, 709 F.2d at 1318-19; Earl's Tire Serv., 6 B.R. at 1023; Alta Title, 55 B.R. at 137.
This has been understood for at least seventy years: "it is indispensable to the maintenance of the petition that the existence of three petitioners holding provable claims be established, if challenged." Canute Steamship, 263 U.S. at 248, 44 S.Ct. at 68 (emphasis added).5
A petition on Official Form No. 5 is regular on its face if the boxes next to the preprinted essential allegations are checked and if the form is otherwise correctly completed.
Whether the defense of insufficiency in number of petitioners may be raised by a Federal Rule of Civil Procedure 12(b)(6) motion is muddled by a gap in the rules of procedure. Defenses to involuntary petitions are "presented in the manner prescribed by Rule 12," which ordinarily means by answer or by motion. Fed. R.Bankr.P. 1011(b). The gap is created by another rule prescribing a specific procedure, mandating notice to creditors and opportunity to join in the petition, that is to be followed when the defense of insufficiency in number of petitioners is raised in the answer to a petition filed by fewer than three creditors.6 Fed.R.Bankr.P. 1003(b). Can the same defense be raised by motion? Can other forms of the defense (e.g., the third petitioner was ineligible to petition) be raised by motion? The rules are silent.
The better answer is that a Rule 12(b) motion is a permissible way to raise the substantive defense. Indeed, commentators ignore the gap and assert, ipse dixit, that the defense may be raised by motion. E.g., 2 L. King, Collier on Bankruptcy ¶ 303.33 (1992). Among Rule 12(b) motions, only Rule 12(b)(6) fits. Although arguably not within the motions enumerated at Rule 12(b), the defense is analogous to a challenge to a plaintiff's capacity to sue, which is usually permitted to be made under Rule 12(b)(6). 5A C. Wright & A. Miller, Federal Practice & Procedure § 1360 (1992); cf. Patee v. Pacific Northwest Bell Tel. Co., 803 F.2d 476, 478 (9th Cir.1986).
What of the requirement for a list of creditors and an opportunity to allow other creditors to join when debtor challenges the petitioner's assertion that there are fewer than twelve creditors? The rules make the procedure mandatory if the defense is raised in the answer but are silent about what to do if raised by motion. Fed. R.Bankr.P. 1003(b). The sensible solution is for the court to exercise its discretion to impose the same procedure when the defense is raised by motion. Once again, commentators merely overlook the gap and assert that the procedure applies in both instances. 2 L. King, Collier on Bankruptcy ¶ 303.33 (1992).
Although permitted, a Rule 12(b)(6) motion is not ordinarily an efficient way to raise the defense. Except in clear-cut situations, ruling is generally better postponed until trial. As the motion is always premised on evidence from outside the pleadings, summary judgment standards are implicated. The evidence usually overlaps other issues on the merits, such as whether debts are being paid as they come due and which debts are in bona fide dispute. When evidence pertinent to a Rule 12(b)(6) motion is substantially interwoven with the merits, cour...
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